General Practice

Setting budgets for general practice in the new NHS

Peter C Smith, professor of economics. 

Centre for Health Economics, University of York, York YO10 5DD

pcs1{at}york.ac.uk

The centre of the new arrangements for the NHS is the establishment of primary care groups.¹ Budgetary control will be a central concern of these new groups, and the principal instrument for securing that control will be the setting of an indicative budget for each general practice within a primary care group. Although this measure may go some way towards securing the required control, I believe that setting practice level budgets carries potentially serious adverse consequences. This article sets out the problems that health authorities and primary care group management will have to be alert to.

	Primary care groups

Top Primary care groups Experience with practice... Model of expenditure variation Policy implications Discussion References

Primary care groups will be based on all the practices within a geographically defined area covering a population of about 100 000. The groups will receive annual budgets, within which they will be expected to meet virtually all the health care needs of their population. The size of the budget will be determined by the health authority in which the primary care group lies and will be guided by a long term expenditure target set by the NHS Executive.²

Primary care groups are unusual managerial creations. Membership is compulsory, and the constituent practices of a primary care group will be jointly responsible for adherence to its budget. Yet it is not clear how individual general practices will be held to account for their expenditure. The white paper envisages four levels of primary care group, ranging from a mainly advisory role (level 1) to a freestanding body responsible for commissioning and providing care (level 4).¹ This implies progressively increasing freedom of action and responsibility for the budget.

Whatever level of responsibility a primary care group is operating at, securing budgetary control will be a high priority. However, the number of managerial devices available to secure such control is limited. One possibility is to adopt clinical guidelines in order to reduce variations in referral practice. However, the main instrument for securing control will probably be setting budgets for individual practices.

	Experience with practice budgets in the NHS

Top Primary care groups Experience with practice... Model of expenditure variation Policy implications Discussion References

The NHS has used practice budgets before. The fundholding initiative gave participating practices budgets for purchasing certain elective procedures and prescriptions.^3-8 However, the scheme covered only about 15% of hospital and community health service expenditure and the budgets (at least in the early years) were relatively generous.⁹ Participation was voluntary, and health authorities assumed responsibility for making good most of any "overspend" by fundholders.⁷ Thus, fundholding did not by most criteria constitute a demanding budgeting system, although there is some evidence that it helped contain prescribing costs. ^{10 11} Standard fundholding will be dismantled under the new arrangements.

In addition to fundholding, since 1991 all practices have been set indicative prescribing budgets under the Indicative Prescribing Scheme. This scheme has had little effect on prescribing practice, probably because of a lack of any associated incentives. ^{10 11}

The total purchasing pilots more closely resemble the arrangements envisaged within primary care groups. In this experiment almost all health care expenditure was devolved from a health authority to the total purchasing site, which typically entailed about three practices. The most serious difficulties emerging from evaluation of the scheme have been the associated increase in managerial costs and the difficulty of identifying a "fair" budget.¹²

	Model of expenditure variation

Top Primary care groups Experience with practice... Model of expenditure variation Policy implications Discussion References

A satisfactory budgetary formula for individual practices should offer an unbiased estimate of the expected level of expenditure within each practice if it were to respond to the needs of its patients in a standard fashion. Yet, even if the technical difficulties of developing such a formula can be overcome, expenditure is likely to vary considerably from that predicted by any formula. ^{13 14} Variation in practice expenditure can be divided into five types (box).

	Policy implications

Top Primary care groups Experience with practice... Model of expenditure variation Policy implications Discussion References

If significant sanctions or rewards were to be attached to variations in expenditure from budgets, general practices can be predicted to respond in various ways.^19-28 They can be summarised as follows.²⁹

Firstly, practices that perceive that their expenditure will fall below their budget may "spend up" in order to protect their budgetary position in future years. Secondly, practices that perceive that their expenditure will exceed their budget may be thrown into crisis. Thirdly, patients may be treated inequitably. Different practices will be under different budgetary pressures and so may adopt different treatment practices. Moreover, choice of treatment within a practice may vary over the course of a year if the practice's perception of its budgetary position changes. ^{30 31} Fourthly, practices may adopt a variety of defensive strategies, such as cream skimming patients they perceive to be healthier than implied by their capitation³² and, in the extreme, even insuring with a third party against overspending their budget. More generally, if the complex and subtle influences on variation are not properly recognised, practices may become alienated from the budgetary system, jeopardising budgetary control throughout the NHS and threatening the viability of the latest NHS reforms.

Nevertheless, I would not argue that primary care groups should refrain from setting practice budgets. Rather, they should use them with great caution and ensure that the budgets reflect legitimate variations in health care needs. Various risk management strategies might be adopted to lessen some of the adverse consequences outlined above.

Pooling practicesBudgets become less susceptible to random per capita variations as the population to which they refer increases. This suggests allocating a joint budget to voluntary associations of practices that wish to collaborate. However, evidence from the total purchasing pilots suggested that budgetary control was more difficult in multipractice sites than single practice sites,¹² highlighting an important tension that exists between the goal of securing an accurate budget (which would favour large organisational units) and the goal of minimising managerial costs (which favours small organisational units).

	Discussion

Top Primary care groups Experience with practice... Model of expenditure variation Policy implications Discussion References

Evidence from the business sector indicates that budget supervisors should investigate and act on variations from budgets intelligently and flexibly. This principle is likely to be of paramount concern as NHS budgets are devolved down towards practices. Furthermore, it is important to ensure that any sanctions (or rewards) attached to the budgetary system are commensurate with the degree of control exercised by the practice over expenditure. General practitioners' own actions are likely to have only a limited role in securing compliance, and therefore sanctions and rewards should be relatively modest. In particular, it would be unreasonable to allow practices to retain budget surpluses unless it was clearly understood that future deficits were to be made good from the retained balances. This also implies that overspending practices should be allowed to take forward deficits.

In practice it is difficult to imagine circumstances in which implementation of such a "hard" budgetary system is desirable. The limitations of any budgetary formula are likely to mean that there will be some persistent variation from fair budgets, even after variations in clinical practice have been accounted for. It is almost certainly the case, therefore, that any system of general practice budgets should be predominantly indicative and advisory, at least initially.

Budget meeting in a general practice

	Acknowledgments

This paper has been presented in several forums, and I am grateful for all the feedback received, in particular from Mark Groom at the NHS Executive and an anonymous referee.

Funding: I am funded in part by the Department of Health under its health economics programme at the Centre for Health Economics.

Competing interests: None declared.

	References

Top Primary care groups Experience with practice... Model of expenditure variation Policy implications Discussion References

1. UK Departments of Health. The new NHS. London: Stationery Office , 1997.
2. NHS Executive. HCHS revenue resource allocation to health authorities: weighted capitation formulas. Leeds: NHS Executive , 1997.
3. Petchey R. General practitioner fundholding: weighing the evidence. Lancet 1995; 346: 1139-1142[Medline].
4. Goodwin N. GP fundholding: a review of the evidence. In: Harrison A, ed. Health care UK 1995/96. London: King's Fund , 1996.
5. Glennerster H, Matsaganis M, Owens P, Hancock S. Implementing GP fundholding: wild card or winning hand? Milton Keynes: Open University Press , 1992.
6. Dixon J, Glennerster H. What do we know about fundholding? BMJ 1995; 311: 727-730[Abstract/Free Full Text].
7. Audit Commission. What the doctor ordered. A study of GP fundholders in England and Wales. London: HMSO , 1996.
8. National Audit Office. General practitioner fundholding in England. London: HMSO , 1994.
9. Dixon J, Dinwoodie M, Hodson D, Dodd S, Poltorak T, Garrett C, et al. Distribution of funds between fundholding and non-fundholding practices. BMJ 1994; 309: 30-34[Abstract/Free Full Text].
10. Baines D, Tolley KH, Whynes DK. Prescribing, budgets and fundholding in general practice. London: Office of Health Economics , 1997.
11. Walley T, Wilson R, Bligh J. Current prescribing in primary care in the UK: effects of the Indicative Prescribing Scheme and GP fundholding. Pharmoeconomics 1995; 2: 320-331.
12. Mays N, Goodwin N, Bevan G, Wyke S. Total purchasing: a profile of national pilot sites. London: King's Fund , 1997.
13. Crump BJ, Cubbon JE, Drummond MF, Hawkes RA, Marchment MD. Fundholding in general practice and financial risk. BMJ 1991; 302: 1582-1584.
14. Martin S, Rice N, Smith P. Risk and the GP budget holder. York: Centre for Health Economics, University of York , 1997(Discussion paper 153.)
15. NHS Executive Resource Allocation Funding Team. 1988/89 health authority revenue cash limits exposition book. Leeds: NHS Executive , 1988.
16. Newhouse JP, Manning WP, Keeler EB, Sloss ES. Adjusting capitation rates using objective health measures and prior utilisation. Health Care Financing Review 1989; 10: 41-54[Medline].
17. Roland MO, Bartholomew J, Morrell DC, McDermott A, Paul E. Understanding hospital referral rates: a users' guide. BMJ 1990; 301: 98-102.
18. Ellwood S. Pricing of services in the UK NHS. Financial Accountability and Management 1996; 12: 281-301.
19. Emmanuel CR, Otley DT, Merchant K. Accounting for management control. London: Chapman and Hall , 1990.
20. Nove A. The Soviet economic system. London: Allen and Unwin , 1980.
21. Argyris C. The impact of budgets on people. Ithaca: Controllership Foundation , 1952.
22. Hofstede GH. The game of budget control. London: Tavistock Institute , 1968.
23. Buckley A, McKenna E. Budgetary control and business behaviour. Accounting and Business Research 1972; 32: 137-150.
24. Hopwood AG. An empirical study of the role of accounting data in performance evaluation Journal of Accounting Research 1972; 10(suppl): 156-182.
25. Otley DT. Budget use and managerial behaviour. Journal of Accounting Research 1978; 16: 122-149.
26. Govindarajan V. Appropriateness of accounting data in performance evaluation: an empirical examination of environmental uncertainty as an intervening variable Accounting, Organizations and Society 1984; 9: 125-135.
27. Briers M, Hirst M. The role of budgetary information in performance evaluation Accounting, Organizations and Society 1990; 15: 373-398.
28. Macintosh N. The social software of accounting and information systems. London: Wiley , 1985.
29. Smith P. Devolved purchasing in health care. London: Nuffield Trust , 1997(Health economics series: paper 2.)
30. Glazer J, Shmueli A. The physician's behavior and equity under a fundholding contract. European Economic Review 1995; 39: 781-785.
31. Pollack H, Zeckhauser R. Budgets as dynamic gatekeepers. Management Science 1996; 42: 642-658.
32. Matsaganis M, Glennerster H. The threat of "cream skimming" in the post-reform NHS. Journal of Health Economics 1994; 13: 31-60[Medline].
33. Bachmann MO, Bevan G. Determining the size of a total purchasing site to manage the financial risks of rare costly referrals: computer simulation model. BMJ 1996; 313: 1054-1057[Abstract/Free Full Text].
34. Bevan G, Baxter K, Bachmann M. Survey of budgetary and risk management of total purchasing pilot projects 1996/97. London: King's Fund , 1998.